Accounting 312- ch 16 - Accounting 312 Chapter 16...

Accounting 312
Chapter 16- Accounting for Compensation
Salary and Bonuses
I. Effective Compensation Programs
1. motivate employees to high levels of performance
2. help retain key employees and recruit new talent
3. base compensation on employee and company performance
4. maximize the employee’s after-tax benefit and minimize employer’s after-tax
cost
5. use performance criteria that the employer controls
B. the accounting for salary is straightforward: companies should report as
compensation expense the amts paid to employees for salaries and wages per the
employment contract; they report as a current liab the amts owed to employees for
salaries at the end of the acctg pd
1. must consider payroll deductions, compensated absences and bonuses
II. . Payroll Deductions
1. include taxes, insur premiums, employee savings, and union dues
2. to the extent that a co has not remitted the amts deducted to the proper
authority at the end of the acctg pd, it should recognize them as current liab
A. Social Security Taxes
a. funds for pymts to OASDI come from taxes levied on both the employer
and the employee
i. employer collects employee’s share of tax by deducting it from
the gross pay and remit to gov’t along with their share
ii. referred to as FICA tax
iii. 6.2% based on the employee’s gross pay up to a $97,500
annual limit
b. optional Medicare taxes- Hospital Insurance Tax
i. 7.65% on an employees wages to $97,500 and 1.45% in excess
of $97,500
c. companies should report as a current liab the amt of unremitted
employee and employer Social Sec tax on gross wages paid
B. Unemployment Taxes
1. FUTA tax required if:
a. those who paid wages of $1500 or more during any calendar quarter in
te yr or preceding yr
b. those who employed at least one individual on at least one day in each
of the 20 wks during the current or preceding calendar yr
2. only employers pay the unemploy tax
3. differs by state
4. 6.2% on the first $7,000 of compensation paid to each employee during the
year; the employer receives tax credit not to exceed 5.4% for contributions paid
to a state plan for unemployment comp
5. merit rating- reduces the state contribution rate
a. ie: reduction if display their benefit and contribution experience that
they provide steady employment
6. because both the fed and state unemployment taxes accrue on earned comp,
co should record the amt of accrued but unpaid employ contrib. as an operating
expense and as a current liab when preparing financial statements at yr end

C. Income Tax Withholding
1. employers withhold from each employee’s pay the applicable income tax due
on those wages
a. amt depend son the length of the pay period and each employee’s
taxable wages, marital status and claimed dependents
III. Compensated Absences
A. they are paid absences from employment- such as vacation, illness, holidays
B. companies should accrue a liability for the cost of compensation for future absences
if all of the following exist:
1. the employer’s obligation relating to employees’ rights to receive comp for